DISCRETIONARY INCOME

Discretionary income is the amount of income consumers have left over
after paying their necessary expenses, such as food, rent or mortgage
payments, utilities, and insurance. A similar concept is disposable
income, which is the amount of income consumers have left over after
paying their taxes. Disposable income is then used to pay necessary
expenses. Many consumers do not spend all of their disposable income;
instead, they may save or invest some of it. The amount that remains can
be spent on luxuries, as opposed to necessities, at the consumers'
discretion, and so is known as discretionary income. It is important to
note that what qualifies as discretionary income may vary for different
individuals and different income levels, as well as over time. For
example, a color television set may be a discretionary purchase for a
lower-income family, but it may be considered a necessity by a wealthy
senior citizen.

The U.S. Bureau of Labor Statistics and the U.S. Census Bureau collaborate
to publish ongoing studies of discretionary income and consumer spending.
Census Bureau statisticians rank a number of American households according
to age, size, and geographic area of residence. They then track the income
levels of these households as well as their level of spending in
various expense categories, including necessities (such as food, housing,
clothing, transportation, and health care) as well as luxuries (such as
alcohol, tobacco, entertainment, and education). These studies are used to
determine how much money a household typically needs to maintain its
standard of living. Many private firms in the country undertake their own
studies of discretionary income, but their analyses are also based on the
publicly available (online as well as on CD-ROM) census data.

Knowing the pertinent facts about discretionary income is of vital
importance to both business and government. Companies are interested in
discretionary income levels of consumers in various geographic areas, age
brackets, and socioeconomic backgrounds because consumers with larger
amounts are more likely to spend their money on the goods and services
they provide. The statistics also provide information about consumer
spending habits that can be useful in targeting marketing campaigns.
Although the data alone cannot predict how a certain consumer will choose
to spend his or her discretionary income, it can provide useful
information to help marketers make sound planning decisions.

Discretionary incomes of people in certain age groups are of particular
value to business and marketing specialists. For example, those over the
age of 50 have half of the total amount of discretionary income in their
control, making the 50-plus age category the wealthiest group in the
nation. This group also corners three-quarters of the bank deposits in the
nation, and accounts for 80 percent of all savings accounts. In short, the
"over 50s" have enormous financial clout. Similarly, teenage
and young adult consumers have considerable sums of discretionary
income—and are thus highly valued by companies—because they
are more likely to have their living costs absorbed by other individuals
(typically parents) and they are less likely to be in a position where
they have to devote resources to support a family.

FURTHER READING:

Russell, Cheryl.
The Official Guide to American Incomes: A Comprehensive Look at How Much
Americans Have to Spend: With a Special Section on Discretionary Income.
New Strategist Publications and Consulting, 1993.

Woodard, Kathy L. "Boomers Lead Boom in Home Re-modeling."
Business First-Columbus.
April 21, 2000.